The value of a stock isn’t necessarily a fixed price, depending on market conditions and perceptions among other things. It’s important to understand that a stock doesn’t have a fixed price, but shifts depending on speculation and demand. When investors are buying the stock enthusiastically because they believe it will make for a good investment, the stock price will typically increase. Likewise, if people think that the outlook is poor and rush to sell or short the stock in question, you will find the value falling. The price is only one measure of a stocks true value.

You can earn big returns on your investments by selling your shares for more than you paid for them or by collecting dividends, or both! The profit that you will make on the sale of stock is known as a capital gain. Naturally, you don’t get to keep 100% of your profits. The tax man will collect taxes on gains as well as a commission on the sale; however, if you’ve owned the company for more than a year at the point when you sell it it is considered a long-term gain… this means a lower tax rate on your return. What does this equate to? That’s right. More cash in your pocket!

Individual stock market picks and investing ideas should follow with some risk in putting money on the favored bet. Investing involves taking some risks with your money, but it is not like betting on horses. A long shot can always win, even if everyone else is putting their money on the favorite (larger market capitalization). The direction of money influences the outcome in the stock market. If a lot of investors are buying X, than X’s stock price will go up. The shares of X become more valuable because more investors want it. Likewise, the reverse is true, so it is important to keep watch for the profit problem that exists.

Program trading, meaning buying or selling either a “basket,” or group, of 15 or more stocks with a combined worth of more than $15 million, or all the stocks in a particular index, can cause abrupt price changes in stock or a group of stocks… potentially even in the entire market! Some program trades are automatically fired off every time a limit order hits the target price that have been set to limit losses. And, the traders may even initiate programmed buys to profit from large spreads they detect between offers to buy and prices asked by sellers. In order to control potentially serious consequences, exchanges have instituted restrictions, called circuit breakers, to stop trading activity altogether in the event that the market collapsed. This essentially limits a complete panic drop in the system, such as that which happened during the Great Depression.

Dividends are a completely arbitrary portion of profits paid to shareholders each quarter. A company’s board of directors decides whether or not they will have a dividend kick-back, or if they will simply reinvest the profits. Qualifying stock dividends are also taxed at your long-term capital gains rate.

Return on investment is one of the most objective metrics of the value of a stock. Referring to the amount you return for every dollar invested in a stock based on the past history of solid growth in all of your investing ideas.

Now that you know a bit more about how the markets flow and how the price of a stock sometimes reflects speculation more than actual internal value, you can start to make some big profits investing like a pro. Keep in mind that while big funds may move the markets, as an individual investor you have the ability to sneak in and out of insane gains.